I’m writing this from the airport, so I’ll be brief.

I think the S&P 500 is at a very interesting juncture right now.

Market commentators have been have been explaining the recent decline as the product of computers run amok, either controlled by algorithmic traders or by practitioners of “risk parity” or similar mechanical hedge fund strategies (more on this tomorrow).  Yesterday’s Financial Times offers a different explanation.  A large brokerage firm has analyzed mutual fund betas (essentially indicating whether they’re positioning themselves for an up market or a down one).  It finds that funds in the US have shifted their positioning dramatically over the past few weeks from an aggressive posture to a defensive one.

This is interesting in iteslf, if true.  But if so, we might interpret the decline of the past weeks not as the precursor of yearend mutual fund selling but the actual selling itself–only occurring much, much earlier than usual.

Why would this be important?   …because September-October mutual fund selling is most often followed by a sharp November upward bounce.  I’m not sure we’ll be so lucky, but it’s worth watching for.

In addition, we should be on guard for any shifting in the pattern of winners and losers in the parmet.  Typically, some pattern change occurs at the end of a significant decline.  The shift would likely both imply that the selling has run its course and give a preview of future market leadership areas.